[Bank] (“the Bank”), submitted an appeal to the FDIC’s Assessment Appeals
Committee (“Committee”) by letter dated April 29, 2004. The Bank is
appealing the April 2, 2004 determination by the FDIC’s Division of
Insurance and Research (“DIR”) denying the Bank’s request for review of its
supervisory subgroup (“SS”) assignment for the January 1, 2004 semiannual
assessment period.

At its meeting held on July 19, 2004, the Committee allowed the Bank,
pursuant to Committee rules, to appear and make an oral presentation in
support of its case for an assessment risk classification change. The
presentation was highly professional and helpful in resolving this matter,
which involves application of the SS cut-off dates set out in
Financial Institution
Letter (“FIL”) 90-2003 (November 28, 2003). After carefully considering
all of the written and oral submissions and facts of this case, the
Committee has determined that the Bank’s appeal must be denied.
1

Background

The Bank was assigned an SS rating of “1C” for the January 1, 2004,
semiannual assessment period. That assignment was based, in part, on a
February 10, 2003 joint examination conducted by the Federal Reserve Bank of
Atlanta (“FRB”) and Alabama State Banking Department (“State”). This was the
last examination transmitted to the Bank prior to September 30, 2003, the SS
cut-off date for the January 1, 2004 semiannual assessment period.

By letter dated March 9, 2004, addressed to DIR, the Bank requested
review of its risk classification, seeking an upgrade to a “1B.” In support
of its position, the Bank cited a joint FRB/State examination begun on
October 20, 2003, that ultimately upgraded the Bank’s CAMELS composite
rating from “4” to “3.” DIR denied the Bank’s request for review of the risk
classification by letter dated April 2, 2004. In its decision DIR, among
other things, outlined the guidelines set forth in FIL 90-2003 governing the
determination of assessment risk classifications, discussed what is known as
the “reconcilement period,” and concluded that insufficient evidence was
available during the October 15 to November 19, 2003 reconcilement period to
determine whether an upgrade would be appropriate.

In its appeal letter to this Committee, the Bank argues that the SS
rating assigned to it as of the September 30, 2003 cut-off date was not
reflective of all information available to the FDIC as of the cut-off date
and subsequent reconcilement period, and that the rating is therefore
incorrect. The Bank also suggests that, based upon conversations with
Division of Supervision and Consumer Protection (“DSC”) staff in the FDIC’s
Atlanta Regional Office, the Bank understood that a request for review would
be granted if the Bank’s CAMELS composite rating was upgraded to a “3,”
provided the FDIC concurred with the upgrade. Finally, the Bank suggests
that the FDIC accepted “other pertinent information” for purposes of a
downgrade in 2003 but is rejecting “other pertinent information” for
purposes of an upgrade in this case. The Bank believes that the FDIC had, on
or before the end of the reconcilement period, an extensive amount of other
pertinent information upon which it could have, and should have, concluded
that the Bank’s condition had improved sufficiently to justify an upgrade to
an SS classification of “B” based on factors used to assign risk
classifications outlined in the FDIC’s FIL 90-2003.

Analysis

SS assignments are made in accordance with the FDIC’s regulations,
specifically,
12 C.F.R. § 327.4(a)(2), which requires that the FDIC consider
supervisory evaluations provided by an institution’s primary federal
regulator and other relevant information in making these assignments

Under guidelines set forth in
FIL 90-2003, the FDIC assigns a SS to each
institution for each semiannual assessment period based on a variety of
factors, including FDIC review of the results of the last examination
finalized and transmitted to the institution by the primary regulator on or
before the cut-off date.2
Under the FIL, the cut-off date for the January 1 assessment period is the
preceding September 30. The FIL expressly states that the cut-off date
relates to the FDIC’s determination of an institution’s risk profile as of
that date. The FDIC’s review may also include a review of other written
findings that result in a composite rating change by the primary regulator;
a review of the finalized results of independent, joint or concurrent FDIC
examinations; results of offsite statistical analysis of reported financial
statements; or other pertinent information.

To ensure greater fairness in the application of cut-off dates, and to
allow consideration of unusual circumstances, the FDIC continues to look at
the information referred to in FIL-90-2003 for a period of approximately six
weeks after the cut-off date, in what is known as the “reconcilement”
period. As provided by the FIL: “Institutions whose risk profile might have
changed since their last examination can be subject to supervisory subgroup
upgrades or downgrades, as more recent examination information may reflect,
during the reconcilement period.” For those institutions that are reviewed
during the reconcilement period, recent information, including information
obtained from examinations in process, generally will be considered.
Typically, consideration may be given to examinations that are near
completion. Examinations starting after the cut-off date, however, may not
yet provide conclusive information to determine any preliminary ratings.

In applying the guidelines in the FIL, the FDIC looks to whether
examination results were transmitted in writing to the institution on or
before the cut-off date, unless an institution is reviewed during the
reconcilement period or there is evidence of a change that is confirmed by
an ongoing examination during that period. The information available to the
FDIC during the reconcilement period and regarding the Bank, supported the
SS of “C” as of the cut-off date; confirmation of its upgrade was not
apparent until after the reconcilement period ended.

The Bank contends that its condition as of the September 30, 2003, SS
cutoff date should have been reflective of a composite “3” rating based on
the Bank’s improved condition as shown in the joint FRB/State examination
begun on October 20, 2003. Specifically, the Bank asserted its
“understanding” that the State and the FRB advised the FDIC prior to the end
of the reconcilement period that, although the rating had not been
finalized, it appeared the Bank’s composite rating would be upgraded to a
“3.” The Bank contends that a rating need not be finalized in order for the
FDIC to change an SS classification, citing FIL 90-2003 (“other pertinent
information” may also be considered when assigning the SS classification).
Other pertinent information, the Bank asserts, was available to the FDIC
through the FDIC’s on-site examination participant and justified an upgrade
to “B” prior to the end of the reconcilement period.

In fact, the Bank was flagged for review during the reconcilement period
(October 15 – November 19, 2003) and FDIC staff conducted a review of the
Bank for Risk Related Premium purposes. Nonetheless, conversations between
FRB and FDIC representatives at the end of the reconcilement period
indicated that the joint FRB/State examination begun on October 20, 2003
(with FDIC participation) was still in process and that no preliminary
findings or conclusions were available at that time and would not be
available for an additional three to four weeks. As a result, the FDIC
indicated to the Bank’s regulatory counsel that the FDIC needed more
definitive findings before any changes to the SS classification could be
made based on the October 20, 2003 examination. The Bank acknowledges that
it was told by FDIC staff on November 19, 2003 that the Bank would receive
an SS of “C” for the January 1, 2004 semiannual assessment period. FRB
representatives indicate that it was not until January 9, 2004 that the FRB
and State advised the Bank by telephone that the composite rating would
officially be upgraded to a “3.” On January 15, 2004, examiners met with the
Bank’s senior management at an exit meeting and management was indeed
informed that the new CAMELS rating would be 343433/3. The Bank did not
receive the finalized examination report until March 9, 2004, at a Board of
Directors meeting with FRB/State representatives. In short, insufficient
information was available prior to the end of the reconcilement period to
determine that the Bank’s condition would be upgraded.

The Bank also states that, based upon conversations with DSC staff in the
FDIC’s Atlanta Regional Office, it understood that if the October 20, 2003,
examination ultimately resulted in a “3” composite rating, the Bank could
appeal its SS “C” classification, provide evidence of the upgrade, and, if
the FDIC did not disagree with the upgrade, win the appeal and obtain a
refund. There appears to have been a misunderstanding: FDIC staff members in
the Atlanta Regional Office indicate that they discussed with the Bank its
obligation to pay the deposit insurance assessment by the due date and the
various courses of action the Bank could take regarding a review of its SS
classification but suggest that they did not advise the Bank that its appeal
would be automatically granted: In any event, the statements alleged, even
if made, are incorrect and do not bind this Committee.

The Bank further maintains that the FDIC accepted “other pertinent
information” in denying the Bank’s prior request and related AAC appeal for
review of its risk classification for the July 1, 2003 semiannual assessment
period (In the Matter of the Bank, AAC No: 2004-01
(March 22, 2004)). In that earlier case, the “other pertinent information”
that was accepted by the FDIC consisted of examination findings. The FRB, as
the primary federal regulator, provided an assigned composite rating of “3”
to the Bank based on a joint FRB/State in-process examination that had begun
on February 10, 2003, prior to the March 31, 2003 cut-off date, and the
Bank’s assigned risk classification was “2B.” After the cut-off date -- but
before the end of the reconcilement period -- the FRB examination uncovered
further financial deterioration. This ultimately resulted in a CAMELS rating
of 444443/4 and a final risk classification for the July 1, 2003 semiannual
assessment period of “2C.” The FRB revealed the CAMELS rating to the Bank’s
senior management in a Board meeting held on May 8, 2003; the reconcilement
period did not end until May 16, 2003. For these reasons, the Bank’s request
for review and appeal in that earlier case were properly denied. In both the
earlier and the present case, the same test has been applied.

In the present case, the Bank’s improvement to a “1B” did not become
certain until after the reconcilement period ended. The Bank argues that, in
hindsight, its overall condition as of the September 30, 2003 cut-off date
merited a supervisory subgroup classification of “1B.” This fact is at the
core of the Bank’s argument. The real question, however, is not whether the
Bank was ultimately found to merit an upgrade, but rather by what date the
information became available. Here, that information was not available until
January 9, 2004, well after the reconcilement period had ended.

The timing issues raised by the Bank in this appeal have been previously
considered and consistently decided by the Committee in other appeals. See
e.g., AAC No. 2002-03 (Nov. 25, 2002);
AAC No. 2003-04 (Dec. 16, 2003). To grant the
Bank the relief requested would require, in effect, an extension of the
cut-off date and reconcilement period. Such action would depart from years
of established, consistent FDIC practice. It would so attenuate the cut-off
date as to render it barely discernible and largely ineffective.

Conclusion

While the Committee sympathizes with the Bank’s position and is mindful that
had the results of the FRB/State examination been apparent sooner the
results here might be different, the Bank’s appeal is denied for the reasons
set forth above.

By direction of the Assessment Appeals Committee, dated September 7,
2004.

_____________________________

1
At the oral
presentation, counsel for (the “Bank”) requested that the Committee refer
this matter to the FDIC Board of Directors for consideration. The Committee
determined that referral of the matter to the Board was not warranted.

2
The FDIC Board of Directors (“Board”) addressed the need for cut-off dates
in a 1993 rulemaking in which it called “strict application” of the cut-off
date “the fairest approach.” 58 Fed. Reg. 34357, 34359 (June 25, 1993).
The Board articulated three bases for this view. First, the approach is
fair to all institutions and to the deposit insurance funds. Whether
upgraded or downgraded after the cut-off date, no insured institution will
see the effect of that change until the next semiannual period. Cut-off
dates protect the deposit insurance funds, since it is likely that only
upgraded institutions would ever seek reclassification of their SS
assignment. Second, if changes finalized after the cut-off date were
considered, assessment notices would in effect become preliminary notices,
subject to later revision for, potentially, hundreds of institutions.
Finally, the cut-off date preserves needed predictability for the risk-based
assessment system. In endorsing strict application of cut-off dates, the
Board allows for exceptions only in “unusual circumstances.”